The major U.S. indexes managed to eke out some small gains on Friday, trading in a tight range on quadruple witching day. The S&P 500 gained almost 1.5 points to close at 1117.51, extending a two-week winning streak that represents the index's best two-week run since November. The Dow Jones Industrial Average added just 16 points to settle at 10,450 while the Nasdaq remained above 2300, adding almost three points to close at 2309. Small-caps were about as boring as their large-cap brethren with the Russell 2000 adding just one point to close just below 667.
Stocks seemed to get a lift from speculation that Europe is actually making some progress on solving its sovereign debt crisis and that rosy outlook seemed to be fortified by a rally in the Euro as the beleaguered common currency used by 16 European countries gained the most against the U.S. Dollar in more than a year this week.
The Euro rose 2.3% to $1.2388 against the greenback as traders unwound bearish bets that the Euro's decline would continue. Hedge funds and other speculators reduced short positions in the EUR/USD pair to 62,360 contracts on June 15 compared to 111,945 a week earlier â€“ a drop of 44%, according to Bloomberg News.
Analysts said most of the Euro rally was obviously fueled by short covering, but the fact that Spain was able to hawk $3.7 billion in 10-year bonds on Thursday did not hurt matters. Demand was almost twice the amount on offer, according to Bloomberg. The country was also able to successfully sell almost $592 million in 30-year bonds.
Not to rain on anyone's risk appetite parade, but times have changed as the weekly gains for the major U.S. indexes lagged those seen in the Euro. A rally in the Euro used to encourage far more bullish action in equities than was seen this week and would have been seen by many investors as a sign that risk appetite was at work again. Not so fast. NYMEX-traded gold for August delivery closed at a record high on Thursday and moved to another record high of $1263.70 on Friday before settling at $1258.30. That is still good enough for a new record closing price.
Investors flocked to the yellow metal after the Philadelphia Federal Reserve Survey and jobless claims data released on Thursday provided less-than-encouraging assessments regarding the economic recovery. Gold's ascent has some pundits saying the trade is ''crowded,'' but there is no getting around the fact that gold futures are up 15% this year, dwarfing the returns offered by stocks.
With the SPDR Gold Shares ETF (GLD), the second-largest ETF in the world by assets, trading well into the triple digits after touching a new all-time on Friday at $123.50, some investors may want to find other, more cost-effective ways to play gold's bullish ways. Caterpillar (CAT), the world's largest maker of mining and construction equipment, was the Dow's biggest gainer on Friday, jumping nearly 1%.
While that may not be saying much, if gold prices continue to soar, miners are going to want to pull more of the yellow metal out of the ground and that could spur sales of Caterpillar's heavy mining equipment, none of which is cheap.
Caterpillar was up almost 8% this week, but even more impressive gains could be spotted in the shares of Newmont Mining (NEM), the largest U.S. gold miner, which soared 10% on the week. Options traders seem to be feeling bullish on Newmont as more than 49,000 contracts traded in the name on Friday, more than twice the daily average. Nearly 60% of that volume was in the form of calls.
Volume in the stock was nearly 50% above the daily average on Friday as the stock traversed $60 for the first time in more than four years. After closing at $61.25, Newmont is within earshot of its all-time of $62.70.
Newmont Mining Chart
Gold talk may be a good segue to talk about Goldman Sachs (GS). Wall Street's most prestigious and vilified investment bank was back in the news on Friday. Fortunately for wary shareholders in this marquee name, the Goldman news broke late in the day and the stock was able to manage a small gain on the day.
Goldman has asked the Securities and Exchange Commission (SEC) for more time to reply to the April 16 lawsuit that accuses Goldman of defrauding investors in mortgage backed securities. The firm was originally supposed to respond on Monday, but asked a judge to grant it an extension until July 19. Now infamous Goldman employee Fabrice Tourre also has until July 19 to respond to the SEC inquisition.
The SEC did grant the extension, according to some press reports. Goldman has maintained that it did nothing wrong and that plans to fight the charges. It is the company's right to fight the charges, but given the dramatic plunge in Goldman shares since mid-April, it might be in the company's best interests to go ahead and cut Uncle Sam a settlement check, which everyone knows Goldman can easily afford, and put this issue to rest so the stock can get back to being the juggernaut it once was.
Speaking of some of the more controversial names out there, Friday was another event-filled day for BP (BP) and other names that are tied to the Gulf of Mexico oil spill. Rumors that BP may commence a bond offering as early as Tuesday started to pick up steam. In addition, some press reports said the embattled oil giant may seek up to $5 billion in loans from a syndicate of banks. Reuters actually reported that number may be as high $7 billion.
CNBC reported on Thursday that BP could issue between $5 billion and $10 billion in bonds, but investors fear the impact that a new issue could have on current BP bondholders. The bottom line with a BP bond issue is that the company is going to have to offer a juicy yield, perhaps in the order of 8%-10% to get investors interested in longer-term commercial paper.
CNBC said that BP is shopping the offering to the likes of Fidelity, PIMCO and other bond giants, but the results of those efforts remain to be seen. PIMCO does own $100 million in short-dated BP paper, but whether or not the world's largest bond fund manager embraces longer-term, riskier BP fare may be another issue altogether.
Not helping matters is the fact that Fitch downgraded BP's credit ratings on Tuesday, the second downgrade from that ratings agency in a month. Moody's followed that up with its own downgrade of BP on Friday. ''Moody's updated assessment is that the spill will have a sustained negative impact on the group's free cash flow generation and overall financial profile for a number of years,â€ the ratings agency said.
Lower ratings equal higher borrowing costs for BP and that is not the best of news for a company whose $20 billion contribution to an escrow account to compensate spill victims is viewed as a floor, not a ceiling.
Moody's also took the ratings knife to Anadarko Petroleum (APC), the independent oil and gas producer that owned a 25% interest in the Macondo well. The Moody's rating cut took Anadarko's credit rating to ''Ba1,'' which is junk status. Rising containment costs and the potential for further increases in litigation costs could hamper Anadarko, Moody's said.
Anadarko has been pretty quiet since the spill started, especially when considering this was almost a $74 stock on April 20. On Friday, Anadarko closed below $43. Well enough is enough as far as Anadarko is concerned and the company's CEO James Hackett was vocal in his assessment that the blame for the spill, now the largest in U.S. history, should be placed squarely at BP's doorstep.
Hackett said he was ''shocked'' at how BP operated the rig and that ''BP's behavior and actions likely represent gross negligence or willful misconduct.'' Anadarko claims that a joint-operating agreement between the companies means BP is responsible for damages related to the spill. Anadarko said it was surprised by the Moody's downgrade and that it will work ''diligently'' to regain investment graded investment grade status. The company also said something about protecting shareholders, but at this point, that is may just be perceived as idle chatter.
There is something to the theme of appearing less liable for the spill than BP. Just take a look at shares of Transocean (RIG), the world's largest provider of offshore drilling services and the owner of the Deepwater Horizon rig. Transocean has seen its share price almost cut in half since the rig exploded on April 20 and heading into Friday's trading, the shares were down 14% this month alone, but the stock surged $5.18, or almost 10.5%, to $54.61, capping a 17% gain for the week. There was also some notable options activity in Transocean as traders scooped more than 95,000 calls compared to 61,000 puts. Some traders were even selling the Transocean June 50 puts after the stock moved above that level on Friday. Those options expired yesterday.
Most folks do not have warm and fuzzy feelings toward Transocean following the Gulf disaster. After all, the company's public relations team is only slightly more sensitive than BP's, as highlighted by a closed-door meeting in Switzerland to authorize a dividend and the company's attempts to get a Houston judge to cap its spill-related liabilities at $26.7 million.
What is becoming apparent is that the markets love to find a scapegoat, and in the case of the Gulf of spill, BP stands to be the biggest loser from the standpoint of how much cash the company is going to have to payout in the coming years. Another thing to consider is that perhaps some of the selling in names like Halliburton (HAL), Transocean, and yes, Apache, has been overdone.
Moody's lowered its ratings on Transocean last week for the same reasons it cut Apache and BP yesterday, but the more the blame for this epic disaster flows to BP, the more Transocean shares are going to benefit.
Looking at the charts, the Dow has broken out of the 10,250 range and further closes above 10,400 could be a bullish sign and support can be found at 10,200. A move above 10,550 would indicate further strength and perhaps bring about some fresh buying, but I would be cautious on the Industrials if the index peaks below the 10,185 level.
More importantly, the S&P 500 has also broken out above the 200-day moving average and with Friday's close just above 1117, the index inched above a secondary resistance point. This is a moderately bullish sign and on the downside, a violation of 1100 might send the bulls running for cover. A move below old support at 1085 would clearly be bearish.
S&P 500 Chart
The Nasdaq continues to inch further away from 2300, though Friday's gains were lukewarm and that might be a generous assessment. Support can now be found at 2250 and there is a lot of real estate in between where the index currently resides and its next resistance point, which is just below 2400. Further strength in the S&P 500 would also lend a hand to the Nasdaq.
I am a bit more cautious regarding small-caps as the Russell 2000 probably needs to break above 675 in order to confirm bullishness. Laboring just below 667, the index could swing either way from here, meaning Monday and Tuesday could be important days in terms of where the Russell 2000 ends up next week. A move above 675 would be bullish, a retreat below 650 would be equally as bearish.
Russell 2000 Chart
I am always a little apprehensive about what the summer months can bring for stocks and I think that conservative posture is warranted this summer. The follow through after the major indexes reclaimed their 200-day moving averages has not been impressive and if earnings is indeed going to serve as a positive catalyst, the reports had better be a lot more encouraging than what we have seen from Best Buy (BBY) and FedEx (FDX), or the S&P 500 is going to have some challenges meeting the rosy year-end targets offered by so many analysts just a few months ago. Happy Father's Day to all the dads reading this.